Leading IFA fined £300,000

Thursday 10 June 2004 17:56 BST

ONE OF the UK's largest independent financial advisers has been fined £300,000 for failing to warn its customers about the risks of split capital investment trusts.

The Financial Services Authority (FSA) rapped Hargreaves Lansdown Asset Management for failing to update customers who had put money into a portfolio of splits it managed about the increasing risk of the investment.

The Bristol-based firm initially marketed its Secure Growth Portfolio, which was launched in 1992, as being a low risk investment, which the regulator said was fair as it invested solely in traditional zeros, a type of split capital investment trust, which are generally seen as being lower risk than shares.

But by 2001 the portfolio was invested in a new style of splits, which had high levels of borrowing and high cross holdings in other splits, increasing the risk of the investment.

However, the FSA said Hargreaves Lansdown failed to reflect these important changes in the marketing material it sent out or in the quarterly bulletins sent to investors.

Instead it said its bulletins continued to be 'unrealistically optimistic' regarding the zeros market, and lacked objectivity.

It added that customers would not have been able to deduce that their funds were no longer invested in the traditional zeros that had previously made up the portfolio.

The FSA stressed that today's fine was not connected to a separate investigation it is carrying out into alleged collusive behaviour among fund managers and brokers in the splits sector.

Split capital investment trusts have different classes of shareholders, with some investing for growth and some for income.

But consumers lost millions of pounds when a number of funds collapsed due to stock market falls, high levels of borrowing to invest and high cross-holdings in other trusts.

Harriet Quiney, a senior solicitor at Reynolds Porter Chamberlain, which represented Hargreaves Lansdown during the FSA investigation, said: 'It is accepted that Hargreaves Lansdown provided a limited number of potential investors with out of date material and were too optimistic about the prospects for the zeros market in bulletins provided to existing investors in the Secure Growth Portfolio in January, April and July 2001.

'However, this decision relates predominantly to two specific zeros. It does not mean that zeros were necessarily dangerous or high-risk investments, even though the performance of some zeros has left a lot to be desired.'